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China’s Spontaneous Order

This article appeared in The Journal of Commerce on December 31, 1998.

The secret of China’s “economic miracle” has now been revealed. Speaking from the Great Hall of the People earlier this month, President Jiang Zemin declared that the success of China’s economic reforms over the past 20 years has stemmed from “unswerving adherence to the Party’s basic line.”

By his logic, continued economic success depends on the survival of the Communist Party of China and the primacy of public ownership. Nothing could be further from the truth.

China’s economy has grown by nearly 10 percent a year since 1978 because the government has gotten out of the way of the market and allowed individuals greater economic freedom—not because of strict adherence to the basic Party line, which holds that the individual is a cog in the socialist state.

The truth is that China’s economic reforms have succeeded because of brave individuals who sought to escape from the iron grip of government planners and from a life with no future.

China’s economic success has been the result of millions of hardworking Chinese being set free to pursue a better life.

The first steps were taken by farmers who resisted state coercion under the communal system and initiated what Kate Xiao Zhou, author of How the Farmers Changed China, calls “a spontaneous, unorganized, leaderless, nonideological, apolitical movement.”

The goal was to create a market-oriented system in which farmers would have greater control over the land at their disposal and be able to profit from voluntary exchange.

It was only after that limited, spontaneous experiment with the “household responsibility system” (baochan daohu) proved successful that the Party sanctioned the new arrangement.

As farmers gained wealth, they expanded into nonfarm production and experimented with a new form of collective ownership—the so-called township and village enterprise, or TVE.

Rather than actively promoting that new ownership form, Party leaders cautiously observed its operation.

Once success was evident, the Party again was willing to permit expansion. However, the Party never envisioned that TVEs would far outperform state-owned enterprises.

According to Deng Xiaoping, “Our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously.”

Today, the market-driven, nonstate sector, which includes TVEs, foreign-funded enterprises, private enterprises, and other firms not dependent on government handouts, is the dominant force in China’s “socialist market economy.”

More than 70 percent of industrial output value is now produced outside the state sector.

Most state-owned enterprises, on the other hand, are losing money and eating up China’s capital—more than 50 percent of state investment funds go to them.

Another example of spontaneous order in China is the special economic zones.

Those zones were first set up in the coastal areas. But the idea spread to other areas and took on new forms as competitive forces led some local officials to permit the growth of markets and foreign investment before receiving approval from the central government.

Once the new institutions were successful, however, official recognition followed.

China’s economic success has been the result of millions of hardworking Chinese being set free to pursue a better life. The relaxation of price controls has allowed the market, rather than the plan and the Party, to guide production and consumption.

The ongoing depoliticization of economic life has given people more time and energy to devote to everyday affairs. Personal freedom has inched forward as a consequence.

People are now free to work outside the state sector and to choose their life work, to buy from alternative sources, to invest their money, and to enjoy the infusion of new products and new ideas brought about by trade liberalization.

The real lesson from China’s “economic miracle” is not that economic development depends on adherence to the “Party’s basic line,” but that economic freedom is essential for increasing human well-being.

The willingness of China’s leaders to open China to the outside world, to permit new ownership forms, and to abolish much of the state planning system in favor of market pricing should be congratulated.

But the lack of any clear commitment to private property rights and, therefore, to limited government and the rule of law means that China’s future is unclear.

So long as the market is contaminated by Party politics and state planning, corruption will continue to pollute China’s economic environment.

China’s leaders must recognize the futility of trying to plan the market and control the lives of 1.2 billion people. They need to understand and appreciate the nature of spontaneous market order.

Most of all, they need to adopt what F. A. Hayek has called a “constitution of liberty.”

As my colleague Roger Pilon has stated, “If China is to preserve and expand upon its recent achievements, it will need a constitution that institutionalizes, not simply tolerates, the forces that have led to improvements there.”